Estate planning is all about making thoughtful decisions now to protect your assets and your loved ones later when you can no longer exercise control. Whether you’re thinking about tax efficiency, probate avoidance, or long-term Medicaid care, the tools you choose matter. For Michigan homeowners, one such tool worth exploring is the Lady Bird deed.
The family home is often one of the most significant and valuable assets in an estate plan. It holds not only financial worth but also years of memories and emotional significance as well. For many, it is essential to take early, preventative steps to ensure the property ends up in the hands of the family or friends they intend.
A Lady Bird deed is a powerful estate planning mechanism only recognized in a handful of states. Besides Michigan, these other states include Texas, Florida, Vermont, and West Virginia. This type of deed allows the property owner to sell, gift, mortgage, lease, or otherwise dispose of the property at any time during their life and to retain the proceeds from the conveyance. If the owner retains any interest in the property on the date of their death, the property will then transfer to a selected beneficiary or beneficiaries, including a named trust, without going through the probate process. Probate is a known, lengthy, public, and sometimes financially and emotionally costly legal process. It requires oversight by the probate court, administrative delays, and it opens the property up to creditor claims. By avoiding probate, loved ones can receive the property more quickly, privately, and without added court involvement or legal fees.
In addition to avoiding probate, a Lady Bird deed offers several key advantages for estate planning purposes:
1. Tax benefits. One of the major benefits of a Lady Bird deed is that it prevents the uncapping of property taxes upon the owner’s death. Because the property is not conveyed during the owner’s lifetime, no transfer of ownership would trigger an increase in the property’s taxable value. Additionally, beneficiaries receive a step-up in basis. A step-up in basis reduces the taxable gain on a future sale. In short, this means there is typically no income tax owed when the property is sold after the owner’s death.
2. Medicaid Benefits. Just as with the tax advantages of a Lady Bird deed, the property is not considered transferred during the owner’s lifetime for Medicaid planning purposes. As a result, the future transfer on death of the property is not treated as a divestment and is generally not counted as an asset. However, if the home were instead titled to a revocable trust during the owner’s lifetime, it could lose its exempt status for Medicaid eligibility. Additionally, if the owner passes away without a Lady Bird deed, the property will go through probate, where Medicaid can file a lien against it. In contrast, if the property is instead Lady Bird deeded to children or a revocable trust, it avoids probate and is protected from this Medicaid recovery.
3. Control During Lifetime. Another key benefit of a Lady Bird deed is that it allows the owner to retain full control over the property during their lifetime. By creating an enhanced life estate, the owner does not relinquish any rights and can still sell, transfer, mortgage, improve, or otherwise dispose of the property while keeping all proceeds from those actions. This provides more flexibility than adding others to the property’s title. When additional individuals are added as joint tenants during the owner’s lifetime, their consent is required for any future transactions or improvements involving the property. As a result, the original owner loses a degree of control that a Lady Bird deed preserves. Furthermore, beneficiaries are not set in stone once a Lady Bird deed is recorded. If something were to occur with an intended beneficiary, such that they no longer can or should inherit the property, the deed can be changed and recorded with the county’s register of deeds to reflect the new intended beneficiary or beneficiaries.
While a Lady Bird deed offers several advantages, it also comes with potential drawbacks. One such concern is insurance coverage. Because the property transfers automatically upon the owner’s death, there could be a temporary gap in homeowners’ insurance if the beneficiary is not listed on the original policy. If an unforeseen and unpredictable loss occurs, such as a fire or natural disaster, before the new owner secures their coverage, the damage may not be covered, leaving them unable to collect on the prior policy.
Therefore, Lady Bird deeds offer a unique combination of flexibility, tax efficiency, probate avoidance, and Medicaid protection, but they must be properly drafted and executed by a licensed attorney. If you own a home in East Lansing or anywhere in Michigan, and you’re considering how to pass it on smoothly and strategically, this may be a tool worth discussing with your estate planning attorney.
At Leydorf Law Firm, we help individuals and families create customized estate plans that reflect their unique goals and values. Contact us today to schedule a consultation and take the next step toward peace of mind.